Risk management overhaul tops bank agendas for 2009 - KPMG

06 January 2009 | 11763 views | 3

A lack of stature and resources for risk management are cited as leading contributors to the credit crisis, according to interviews with almost 500 global bank executives conducted by the Economist Intelligence Unit on behalf of KPMG.

More than three-quarters (76%) of the executives surveyed report that risk management is still stigmatised as a support function at their bank, while 45% say their board lacks risk expertise. Furthermore, 64% of respondents believe that their chief risk officer needs to hold greater influence over strategy development.

Michael Conover, a principal in the financial risk management practice at KPMG comments. "Financial models don't prevent poor risk decisions, people do. To restore confidence in bank's risk management policies, banks should start by changing the risk culture, which includes giving risk management a seat at the table when critical decisions are being made, educating senior management and boards on risk management best practices, and setting the right 'tone at the top'."

When asked to rank the leading contributors to the credit crisis, the banking executives named incentives and remuneration (54%), followed closely by lack of risk governance (50%) and risk culture (48%).

Eighty five per cent of respondents say that they have already reviewed, or are in the process of reviewing, their risk management procedures, with another seven per cent saying that they are planning to undertake a review. Yet only 42% of respondents have made - or plan to make - fundamental changes to their risk processes.

Reporting and measuring of risk (78%), risk governance (77%t) and risk culture (77%) are cited as the investment priorities for banks over the coming year. The survey also found that 78% of respondents want to improve the way risk is measured and reported, to help improve the accuracy of forecasts.

Finextra is hosting an important one-day conference and exhibition exploring new directions in bank risk management at the Brewery in London on 5 February. See Finexpo - Risk and Transaction Management for full details and registration.

Comments: (3)

Is it just me or do the statistics of this survey shock you? This article states that 85% of respondents say they have reviewed, or are in the process of reviewing, their risk procedures. Yet only 42% of respondents have a plan to make fundamental changes
to their risk processes. Does this mean that the 43% who are going to do nothing post reveiw believe their risk processes to be up to the job, does this mean that this same percentage have been untouched by the current economic travails and that their current
processes helped them avoid any of the write downs so prevalent in the industry. Where do the Regulators go with this? I thought they were in the process of jumping all over the banks (maybe they haven't jumped very high?) to beef up their approach in this
area and yes if this percentage is true its a very weak response. As for the 45% who say their board lacks risk expertise; I think the shareholders will be most interested to find out which banks are which. Having said that the report then states that 78%
of respondents want to improve the way risk is measured and reported, thank heavens for that, there is a light at the end of the tunnel it just needs to reach the upper echelons of the banks decision making tree.

It is not surprising that the financial markets' risk culture is partially responsible for the credit crunch and the subsequent fall in value of property. The lending landscape is going through profound changes due to the credit. As a result of these changes,
we are seeing increasing pressures on lending operators to manage their risk profiles. The challenge, however, is that mainly the small to medium-sized banks are not geared up for tackling this issue. This is not only due to the prevalent risk culture but
also due to the lack of relevant systems to manage lending portfolios.

Nevertheless, effective risk management will become a critical element for banks of all sizes and a key differentiator for any lending operation.

What is crucial however, is that moving forward, lenders must incerasingly focus on compliance with Basel II IRB requirements. Through Basel II Internal Ratings-Based (IRB) approach, the banking sector can expect to see an imminent competetive watershed
between those banks that are compliant and those that are not. To achieve IRB status, lenders are required to risk rate each customer and demonstrate greater levels of transparency and accountability, capture data more extensively and accurately while interfacing
with a risk rating model. In particular, investors in the bond market will require documentation of the banks' risk profiles, which is a requirement for IRB compliance.

A change in attitude towards better risk management is a cornerstone of improved portfolio management. However, it is risk management systems and IRB compliance which will ultimatley enable banks to establish a strong position to compete in this changing
market. With the landscape set to shift further, the question that remains is how long banks that ignore these considerations and do not comply with IRB status - and not being able to document their risk profiles - can continue to compete effectively and put
their lending operations back on track.

What were all the risk managers doing while all around them the Romans were piling up the firewood? The KPMG survey highlights that they spent most of their time being frustrated at the lack of incentives, proper governance, risk culture and adequate tools
to do their job.
Now that short-term survival is the order of the day, and firms are focused on spending less on anything and everything, or focused on new risk models and new regulation, one of the fundamentals of good risk management - a clean and consolidated underlying
data infrastructure - is in danger of being - once again - the bridesmaid never the bride.
Any risk management system is only going to be as good as the data feeding it. Without the right data, you are driving blindfolded or using the rear-view mirror.
Basic banking disciplines such as liquidity and risk management should be based on real-time consolidation of current and projected positions, and integrated with right-here right-now market and counterparty risk data. In order to be trusted, risk-relevant
data needs to be updated with new transactions, market data feeds and customer/counterparty updates without manual intervention or batch processing.
We need to accept that this is a hard thing to do right - a lot of time and resource is required. But right now, starting in an area where there is so much immediate pain - areas such as counterparty risk or liquidity management - must be the right thing to
do.
Time for a favourite Dr Johnson quote surely - "Men are generally idle, and ready to satisfy themselves, and intimidate the industry of others by calling that impossible which is only difficult."